Garment industry budget debate continues

Garment exporters say the budget proposal to encourage export garments in the local market will not hurt domestic players.

One of the budgeted proposals for the garment industry for 2007 is to allow the export industry a stronger foothold on the local market. “In order to discourage unnecessary and poor quality imports of garments, local sales by garment manufactures will be encouraged subject to a payment of a consolidated duty inclusive of CESS, of Rs. 25 per piece on their local sales,” said the budget speech.

The budget provision does not stipulate any controls on the quantities that can be released and the duty of Rs 25 is a reduction from the previous rate of around Rs 60. However, the BOI, when contacted last week, maintained that BOI controls on quantities, limiting domestic releases to a maximum of 20% of production, would continue to apply, despite the budget proposal.

Nevertheless, another section of the garment industry - manufacturers for the domestic market - is worried about a backlash to their industry. Given the large quantities manufactured by export factories and the BOI privileges enjoyed by these companies, manufacturers for the local market are concerned about their market share and other unforeseen consequences.

“We pay VAT, they don’t pay VAT. So anyway their costs are lower. Producers for the domestic market also don’t get so many concessions as the exporters. There is also the danger of indirectly encouraging counterfeit production,” said Deputy Managing Director, Hameedia, Hussain Sadique.

Local producers say the budget proposal is a convenience mechanism for exporters but will not help uplift the industry, as it does not encourage local producers and does not encourage exporters to improve their quality.

“This is allowing unorganised products to come into the market. For instance at Hameedia we customise to the local market. This is a Sri Lankan brand, designed and developed to the domestic customer, to international quality standards. The exporters are just putting rejects into the market that are actually made for export markets,” said Sadique.

Hundreds of small producers for the domestic market are also at risk of losing their market in the face of increased volumes of mass manufactured clothing by export factories.

Exporting to Sri Lanka
Exporters however, maintain that they are not targeting the domestic market in the face of increasing export competition.

“The requirement was to reduce the tax. We never requested an increase in the quantities that are released to the local market. We are not trying to tap the local market,” noted General Manager of MAS Holdings Prasanna Hettiarchchi.

Exporting factories say that domestic outflow will remain at around 10% of total order quantities. They maintain that this 10% local output is due to manufacturing systems that often force excess imports of raw materials and production over-runs. The current tax rates make such excess production and rejects uncompetitive in the local market.

The reduction in taxes is expected to largely benefit small and medium (SME) manufacturers by allowing cost recovery. The SME sector is the most hurt by increased competition after quota removal and increasing domestic production costs.

Counterfeiting activity, say exporters, will be contained through industry self monitoring mechanisms. Although export clothing is released into local markets even now, this requires brand owner approval. The clothing must then be de-labelled to remove any traces of identification, to protect brand value.

“Subject to all the terms and policies of the customer and ensuring that the brand is protected, a certain amount of garments are released into the local market. Counterfeit producers will immediately get into trouble with the customers,” said Manager Corporate Communications at Brandix Lanka, Ms Kishani de Silva. Brandix is Sri Lanka’s single largest garment exporter.

Large exporters also maintain special operations units, at their own cost, to police the markets for unauthorised copycat clothes.

“During the space of about 11 months the industry has facilitated the prosecution of around 14 cases of counterfeiting. Many large manufacturers have brand protection units. These units look into the local market to see if counterfeits are in the market and they work with government agencies to apprehend them,” said Hettiarchchi.

The unusually high vigilance is to safeguard against indirect damages.

“There is a ‘manufacturer identification’ on the labels of these clothing items. The identification allows you to home-in on where in the world and at what factory the item was manufactured. Counterfeiters copy the label and with it, the identification. So if the copied product is one that is made at one of our factories, we can be held liable for counterfeiting, although we did not do the counterfeiting,” explained Hettiarachchi.